Inflation spooks the markets
Closing

Led by selling in metal, energy and banking stocks, the Indian markets closed deep in the red today. However, some amount of buying was seen in stocks from the realty and IT sectors. Over the course of the day, the indices steadily slipped deeper into the red on sustained selling activity. This was despite their opening close to the breakeven mark.

The BSE Sensex and NSE Nifty closed with losses of around 255 points (1.4%) and 82 points (1.5%) respectively. Stocks from the BSE Midcap and BSE Smallcap indices also witnessed selling pressure. These closed down by 0.4% and 0.3% respectively. On the broader BSE, one stock gained for every one that closed in the red. The rupee was trading at 44.63 to a US dollar at the time of writing. Among other key Asian markets, while China closed lower by 0.9%, Japanese index was off by 1.1%.

IT stocks were among the few exceptions today, as these closed strong. Key gainers included Infosys, TCS, and HCL Tech. These gains seem on the back of expectations of a good set of numbers from the IT companies for the quarter ended March 2010. Infosys, for instance will be announcing its results on April 13 (Tuesday). Today's gains came after the beating these stocks have seen over the past few days. This was owing to the appreciation of rupee against the US dollar and the fear that this would impact IT companies' margins in the coming quarters. Anyways, today's buying can purely be seen in anticipation of good numbers from these companies for the March quarter.

Metal stocks closed weak today. Key losers here included SAIL, JSW Steel, and Tata Steel. SAIL was in fact the worst performer among NSE-50 stocks. While there's no news that suggests such a fall in the stock today, the government today approved a 20% stake sale in the company as a way to raise divestment money. As per reports, the sale will happen in two tranches, with each tranche having a 5% government stake and a 5% fresh equity issuance. The first tranche is expected to fetch the government US$ 1.8 bn at the current market price. After the sale of both tranches is completed, the government's stake in the company would come down to 69%. The funds from fresh issue are expected to be utilised towards expansion of the company's steelmaking capacity.

India's food price inflation numbers were announced today. The same has increased to 17.7% for the week ended March 27. This is higher than the 16.4% rate recorded for the week ended March 20. This further strengthens the argument for the RBI to further raise interest rates in its April 20 monetary policy meeting. While that may be the immediate reaction of the RBI, over the longer term too policy making will be determined by how inflation shapes up. Hence if inflation refuses to come down from such high levels in the coming months, one can expect further monetary tightening.

Titan Industries plays the regional card
01:30 pm

Although trading in a volatile manner, the markets dropped further into the red during the previous two hours of trade. However, at the time of writing the market breadth was positive as the gainers outnumbered the losers in a ratio of 1.3 to 1 on the overall BSE. While stocks from the consumer durables, IT and realty spaces are amongst the key gainers, those forming part of the BSE-Metal, BSE-Bankex and the BSE-FMCG indices are seeing the most pressure.

The BSE-Sensex is trading lower by about 120 points, while the NSE-Nifty is trading lower by about 35 points. However, stocks from the midcap and smallcap space are trading higher with the BSE-Midcap and BSE-Smallcap indices up by about 0.1% and 0.5% respectively. The rupee is trading at 44.61 to the US dollar.

Stocks of tyre manufacturing companies have been seeing some action over the past few weeks on the back of volatile movements in prices of rubber (key raw material). A leading business daily has reported that during FY10, natural rubber output decreased by about 3.8% YoY, while the consumption improved by about 7% YoY. The output of natural rubber had dropped due to poor monsoons last year. With the demand-supply gap widening, prices of the commodity have moved upwards.

Price of domestic rubber is priced higher by about 10% to 11% as compared to imported rubber. This is why rubber imports have increased by about 120% YoY to about 170,000 tonnes or about 18% of total consumption. The same figure last year stood at about 9% YoY. Plus, it is also believed that tyre industry, the key consumer of rubber, is on an expansion spree. While tyre majors such as Ceat, JK and Bridgestone have commissioned capacity-expansion plans last year, other tyre manufacturers such as Birla, Apollo and TVS Sri Chakra Tyres have installed new plants. The Rubber Board is expecting expansion to continue this year as well. However, it must be noted that tyre companies will not find it difficult to pass on the costs to their consumers, considering there is an overall shortage in the radials market as well.

Retail stocks are currently trading firm led by Titan Industries, Koutons Retail and Trent. A leading business daily has reported that the management of Titan Industries' is planning to enter the lucrative regional ornaments market as a new strategy for its Tanishq brand. The main idea of this development is to cater to the requirements of brides belonging to different communities around the country. At present the products sold under the brand are standard jewelry in the wedding range.

It is believed that the jewellery market in India is sized at about Rs 1 trillion, of which wedding jewellery holds nearly half the share. This move is a positive one for the company considering that it will give its brand some presence across regional markets as well. However, it will definitely have to compete with the small and unorganized regional players across the nation. The jewellery segment contributes to about 70% of the company's revenues.

Investors prefer smallcaps, midcaps
11:30 am

The Indian markets continued to trade on a weak note during the previous two hours of trade. Currently, selling activity is being witnessed across sectors led by stocks from the banking, power, telecom and metals. Stocks from the realty and software sectors are leading the pack of gainers. Select stocks from the auto sector are able to garner investors' interest.

The BSE-Sensex is trading lower by 50 points while the NSE-Nifty is trading lower by 18 points. However, stocks from the midcap and small cap spaces are trading in the green. The BSE-Midcap and BSE-Smallcap indices are trading higher by 0.4% and 0.9% respectively. The rupee is trading at 44.61 to the US dollar.

Sun Pharma has won USFDA approval to sell a generic version of GlaxoSmithKline Plc's Wellbutrin SR used to treat depressive disorder. The generic Bupropion Hydrochloride tablets include three strengths of 100 milligram (m gm), 150 m gm and 200 m gm. These strengths have combined annual sales of US$ 300 m in the US. This is a positive for the company and will bolster sales from the highly competitive US generics market. It must be noted that in recent times Sun Pharma's US business has been under pressure since its 76% subsidiary Caraco was not compliant with quality manufacturing standards of the US FDA. The stock of Sun Pharma is trading lower currently.

As per a leading business daily, auto major Mahindra & Mahindra has hiked prices of its utility vehicles. The prices have been revised upwards due to Bharat Stage-IV emission norms and partly on account of increase in cost of commodities and fuel prices. M&M has increased the price of its flagship sports utility vehicle Scorpio between Rs 10,300 and Rs 17,500. It has also hiked utility vehicle Bolero's price by Rs 26,100. The company's latest offering Xylo will now be expensive by Rs 15,300 to 15,900.

Auto majors have had to pass on the increase in cost of upgrading cars with newer technology. Apart from M&M, price revision has been undertaken by many other auto majors. The list includes Maruti Suzuki India, Hyundai, General Motors and Toyota. Stocks from the auto sector are trading mixed currently.

Markets begin on a negative note
09:30 am

The Indian markets have started today's session on a negative note. The benchmark indices opened below yesterday's closing levels and have struggled to move into the positive since then. Other key Asian markets are trading in the red with Malaysia (down 1%) leading the pack of losers. The US markets closed lower by 0.7% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading a mixed bag with auto and telecom stocks attracting some buying interest. However, aluminium stocks are trading in the red. The BSE-Sensex is trading lower by around 75 points, while the NSE-Nifty is down by about 20 points. However, buying interest is being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.1% and 0.4% respectively. The rupee is trading at 44.59 to the US dollar.

FMCG stocks have opened the day on a positive note. Gainers here include Godrej Consumer and Marico. As per a leading business daily, Nestle plans to introduce more products from its global portfolio and 'Indianise' them. It also plans to continue its focus on the rural market. It may be noted that of late, the company has targeted the rural market by aiming at setting up 6,000 new sales points every month. It has also re-launched some of its products across India. Besides enhancing its sales channels and product portfolio in the rural markets, the company plans to reduce its stock keeping units. Nestle is a strong FMCG player in urban centres. But like most FMCG majors, the company is now looking for the next round of growth after the saturation in urban markets. It may be noted that India is still a small part of Nestle's worldwide operations but is one of its fastest growing markets.

Engineering stocks have opened the day on a positive note. Gainers here include Engineers India and Blue Star. As per a leading business daily, Punj Lloyd has won India's largest solar-based contract from the Bihar government worth Rs 2.3 bn for installing water treatment plants in the state. The engineering, procurement and construction contract is for 850 solar-powered water treatment plants for removal of arsenic and fluoride across several districts in Bihar. It will resolve the severe groundwater contamination, resulting in many types of diseases. The contract will be executed by Punj Lloyd Group's renewable energy arm, Punj Lloyd Delta Renewables. In our view, this contract will strengthen the company's capabilities in this space. It is already providing solar lighting for the Commonwealth Games Village. The company's current order backlog stands at Rs 262 bn.

India Inc. improves credit quality
Pre-Open

The economic environment in the second half of FY10 has remained rather strong. And this has benefited not just the stock markets. Even Indian companies have been able to extract some mileage out of it. Crisil, India's leading credit ratings agency has revealed that number of credit quality upgrades have quadrupled in the second half of FY10 over the first half. On the other hand, downgrades have declined by 30%. Thus, more companies have managed to strengthen their balance sheets by reducing debt than the ones that have weakened it. What more, the trend is likely to continue in FY11 as well.

It should be noted that improvement in credit ratings also augurs well for the credit growth in the country. This is because once companies improve their ratings, they find it easier and cheaper to access credit in order to fund their growth. Thus, in light of this, the ratings agency expects credit growth to be in the region of 20% to 22% in FY11. Of course, certain unforeseeable factors like exchange risks and accelerated hike in interest rates could spoil the party for these companies and could lead them again down the path of downgrades.

Furthermore, on an absolute basis there is still some cause for concern as 426 companies still carry a negative outlook against 105 companies that carry a positive outlook. Important to note that real estate and companies dependent on real estate accounted for nearly one fifth of all the companies with negative outlooks while those in the textile business accounted for one eighth or 12% of the total. Clearly, the real estate sector seems to be paying the price for going in for too much leverage when the going was good.

Ultra low rates to continue in the US

To exit or not to exit the stimulus measures - that seems to be the main question for most central bankers around the world. Especially for the central bank where the epicenter of the financial meltdown was located. As per reports, the US Fed recently discussed an exit strategy from the massive economic support measures.

But more importantly, it took no decision on the matter. And so the ultra low interest rates ranging from 0% to 0.25% continue. They are likely to continue for an 'extended period', a term often used by the bankers. We certainly do not envy the position of the US central bank. One the one hand it has to ensure that the fledgling recovery takes roots and on the other hand it has to prevent runaway inflation. But one thing is clear, sooner or later it has withdraw the heavy dosage of liquidity. If only the developed economies rebounded as quickly as some of the emerging ones.